I am pleased to submit my first report to shareholders following my appointment as chairman on 30 April 2008. In so doing I would like to begin by thanking my predecessor, MattRidley, for his outstanding contribution to the company over the first nine years of its life.

The past half year has been a period of turmoil in the UK economy and world financial markets. The prevailing conditions have inevitably had an effect on the level of new investment activity, on company valuations and on the availability of exit opportunities. This situation is likely to persist for some time. Nonetheless your directors believe that the company has continued to make encouraging progress.

Results and dividend

The net asset value per share at 31 July 2008, after deducting the 2007/08 final dividend of 4.0p per share paid in June 2008, was 83.3p (31 January 2008 89.1p). The cumulative return to shareholders (net asset value plus dividends paid since launch) fell back marginally during the half year from 124.5p to 122.7p.

The revenue return per share for the half year rose from 1.2p to 1.6p. This was due in part to the exceptional VAT credit referred to below and in part to the fact that investment income was higher than in the corresponding period, even after allowing for the effect of the increase in the issued share capital. However the half year capital return was minus 4.4p compared with a positive return of 4.4p per share in the corresponding period, reflecting the impact on our portfolio valuation of declining price-earnings ratios and, in some cases, reduced profitability in the underlying companies.

The board has declared an interim revenue dividend of 1.0p per share (last year 1.0p) and an interim capital dividend of 1.0p (last year 1.0p), making a total interim dividend of 2.0p per share which will be paid on 5 December 2008 to shareholders on the register on 7 November 2008. A year ago we announced that it was our objective to maintain an annual dividend of not less than 5.5p per share and this remains our policy notwithstanding current market conditions. It is therefore envisaged that a final dividend of not less than 3.5p will be proposed in due course.

Investments

Our managers have taken a cautious approach to new investment. Three new venture capital investments totalling £2.5 million were completed during the half year:

Tikit Group (£525,000) - AIM-quoted provider of IT solutions and support services to legal and accounting firms, London (acquired in part exchange for the previous holding in TFB Group).

Since 31 July an investment of £429,000 has been made in Advanced Computer Software, an AIM-quoted acquisition vehicle managed by a team who have achieved successful results for us elsewhere in the past.

During the period there were two significant realisations in the portfolio. In April the legal software developer TFB Group was sold to Tikit Group plc for £1.5 million in shares and cash, realising a gain of £0.9 million over cost. In May Product Support (Holdings) was acquired by Wincanton plc in an all-cash deal from which we realised £2.0 million from an original investment of £1.0 million, with the possibility of a small further payment to come depending on future performance. Profitable exits for cash were also achieved from the investments in Arrow Industrial Group and Inspicio. However there was a disappointing outcome to our long-standing investment in DMN, which was sold for a nominal consideration after continuing difficulties with a major contract. The investment had been substantially written down in value in our last annual accounts but a further loss of £0.5 million was crystallised in the current period.

A number of companies in the portfolio are suffering from challenging trading conditions and your directors have as always taken a conservative approach to the valuation of the unquoted holdings. The AIM-quoted part of the portfolio has also fallen in value, with the FTSE AIM index down by over 15% during the half year. Whilst our primary concern must be to protect the value of the existing portfolio as far as possible, we are also conscious that difficult markets can produce good investment opportunities.

Shareholder issues

As previously reported, the company's public offer of new ordinary shares for subscription in the 2007/08 and 2008/09 tax years closed in April 2008 having raised a total of £9.5 million before expenses. This was a highly satisfactory outcome in difficult market conditions.

The mid-market share price fell from 80½p to 76½p during the six months to 31 July. The company has continued its policy of buying back shares in the market at a 10% discount to net asset value and during the period 742,786 shares, representing approximately 1.3% of the issued share capital at the end of the period, were purchased for cancellation at an average price of 78p. 229,923 new shares were issued in June under the company's dividend re-investment scheme.

VAT on management fees

The Government announced in the 2008 Budget that, with effect from 1 October 2008, investment management fees paid by VCTs would be exempt from VAT. HM Revenue & Customs has subsequently accepted that under European Union VAT law this exemption should have applied from 1 January 1990 onwards, and has indicated that claims may be made for repayment of VAT previously paid by VCTs on management fees, subject to certain restrictive time limits.

At this stage the directors are reasonably certain that the amount of VAT recoverable by Northern 2 VCT will be at least £500,000 and an asset of this amount has been recognised in the half-yearly accounts as an exceptional credit in the income statement. A further update will be given in due course.

VCT qualifying status

The company has continued to satisfy the qualifying conditions laid down by HM Revenue & Customs for approval as a VCT. We retain PricewaterhouseCoopers LLP to advise the board in relation to VCT taxation matters.

The future

There is no indication that the UK economy has reached its low point in the current cycle and the general outlook for the immediate future is not good. Your board and managers continue to monitor the company's portfolio closely with the objective of ensuring that it emerges from the present downturn in an overall sound position, but it is possible that there may be some casualties among our holdings along the way. However our company has a strong balance sheet with ample liquidity to take advantage of opportunities on a selective basis as they arise, and we continue to take a positive view of medium to long term prospects.

On behalf of the Board

DAVID GRAVELLS

Chairman

The unaudited half-yearly financial statements for the six months ended 31July 2008are set out below.

INCOME STATEMENT

(unaudited) for the six months ended 31July 2008

Six months ended

31July 2008

Six months ended

31July 2007

Revenue

£000

Capital

£000

Total

£000

Revenue

£000

Capital

£000

Total

£000

Gain on disposal of investments

-

159

159

-

553

553

Adjustments to fair value of investments

-

(2,559)

(2,559)

-

1,815

1,815

------

------

------

------

------

------

-

(2,400)

(2,400)

-

2,368

2,368

Income

1,377

-

1,377

1,005

-

1,005

Investment management fee

(129)

(386)

(515)

(126)

(378)

(504)

Recoverable VAT

119

381

500

-

-

-

Other expenses

(150)

-

(150)

(125)

-

(125)

------

------

------

------

------

------

Return on ordinary activities

before tax

1,217

(2,405)

(1,188)

754

1,990

2,744

Tax on return on ordinary activities

(321)

2

(319)

(179)

119

(60)

------

------

------

------

------

------

Return on ordinary activities

after tax

896

(2,403)

(1,507)

575

2,109

2,684

------

------

------

------

------

------

Return per share

1.6p

(4.4)p

(2.8)p

1.2p

4.4p

5.6p

Year ended 31 January 2008

Revenue

£000

Capital

£000

Total

£000

Gain on disposal of investments

-

1,759

1,759

Adjustments to fair value of investments

-

802

802

------

------

------

-

2,561

2,561

Income

2,111

-

2,111

Investment management fee

(253)

(968)

(1,221)

Recoverable VAT

-

-

-

Other expenses

(266)

-

(266)

------

------

------

Return on ordinary activities

before tax

1,592

1,593

3,185

Tax on return on ordinary activities

(416)

303

(113)

------

------

------

Return on ordinary activities

after tax

1,176

1,896

3,072

------

------

------

Return per share

2.5p

3.9p

6.4p

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

(unaudited) for the six months ended 31 July 2008

Six months ended

31July 2008

Six months ended

31July 2007

Year ended

31 January 2008

£000

£000

£000

Equity shareholders' funds at

1 February 2008

43,753

42,909

42,909

Return on ordinary activities after tax

(1,507)

2,684

3,072

Dividends recognised in the period

(1,870)

(2,160)

(3,109)

Net proceeds of share issues

7,466

211

2,038

Shares purchased for cancellation

(586)

(591)

(1,157)

------

------

------

Equity shareholders' funds at

31July 2008

47,256

43,053

43,753

------

------

------

BALANCE SHEET

(unaudited) as at 31July 2008

31July 2008

31July 2007

31 January 2008

£000

£000

£000

Fixed asset investments held at fair value:

Venture capital investments

Unquoted

25,779

32,739

29,326

Quoted on AIM

2,053

3,370

2,349

------

------

------

Total venture capital investments

27,832

36,109

31,675

Listed fixed-interest investments

17,548

5,073

5,066

------

------

------

Total fixed asset investments

45,380

41,182

36,741

------

------

------

Current assets:

Debtors

872

468

355

Cash at bank

1,565

1,642

7,452

------

------

------

2,437

2,110

7,807

Creditors (amounts falling due within one year)

(561)

(239)

(795)

------

------

------

Net current assets

1,876

1,871

7,012

------

------

------

Net assets

47,256

43,053

43,753

------

------

------

Capital and reserves:

Called-up equity share capital

2,835

2,389

2,456

Share premium

33,922

25,147

26,872

Capital redemption reserve

337

265

300

Capital reserve - realised

8,028

8,868

8,727

Capital reserve - unrealised

937

5,507

4,396

Revenue reserve

1,197

877

1,002

------

------

------

Total equity shareholders' funds

47,256

43,053

43,753

------

------

------

Net asset value per share

83.3p

90.1p

89.1p

CASH FLOW STATEMENT

(unaudited) for the six months ended 31July 2008

Six months ended

31July 2008

Six months ended

31July 2007

Year ended

31 January 2008

£000

£000

£000

£000

£000

£000

Net cash inflowfrom

operating activities

142

313

1,283

Taxation:

Corporation tax paid

-

-

(106)

Financial investment:

Purchase of investments

(22,619)

(6,730)

(8,066)

Sale/repayment of investments

11,580

8,189

14,159

------

------

------

Net cash inflow/(outflow)

from financial investment

(11,039)

1,459

6,093

Equity dividends paid

(1,870)

(2,160)

(3,109)

------

------

------

Net cash inflow/(outflow)

before financing

(12,767)

(388)

4,161

Financing:

Issue of ordinary shares

7,886

215

2,146

Share issue expenses

(420)

(4)

(108)

Purchase of ordinary shares

for cancellation

(586)

(591)

(1,157)

------

------

------

Net cash inflow/(outflow) from financing

6,880

(380)

881

------

------

------

Increase/(decrease) in cash at bank

(5,887)

(768)

5,042

------

------

------

Reconciliation of return before

tax to net cash flow from

operating activities

Return on ordinary activities

before tax

(1,188)

2,744

3,185

Gain on disposal of investments

held at fair value

(159)

(553)

(1,759)

Adjustments to fair value

of investments

2,559

(1,815)

(802)

(Increase)/decrease in debtors

(517)

3

116

Increase/(decrease) in creditors

(553)

(66)

543

------

------

------

Net cash inflow from

operating activities

142

313

1,283

------

------

------

Analysis of movement in net funds

1 February 2008

Cash flows

31July 2008

£000

£000

£000

Cash at bank

7,452

(5,887)

1,565

------

------

------

INVESTMENT PORTFOLIO SUMMARY

as at 31July2008

Cost

£000

Valuation

£000

% of net assets

by valuation

15 largest investments:

Stainton Metal Company

1,002

2,176

4.6

Envirotec

975

2,159

4.6

Paladin Group

1,307

1,984

4.2

Liquidlogic

282

1,497

3.2

Pivotal Laboratories Holdings

857

1,319

2.8

Longhirst Venues

353

1,295

2.7

Crantock Bakery

1,107

1,267

2.7

Abermed

725

1,154

2.5

S&P Coil Products

620

1,083

2.3

Promanex Group Holdings

1,000

1,000

2.1

Optilan Group

1,000

1,000

2.1

Axial Systems Holdings

1,000

1,000

2.1

DxS

684

963

2.0

Arleigh International

435

916

1.9

Britspace Holdings

1,091

884

1.9

------

------

-----

12,438

19,697

41.7

Other venture capital investments

14,457

8,135

17.2

------

------

-----

Total venture capital investments

26,895

27,832

58.9

Listed fixed-interest investments

17,674

17,548

37.1

------

------

-----

Total fixed asset investments

44,569

45,380

96.0

------

Net current assets

1,876

4.0

------

-----

Net assets

47,256

100.0

------

-----

The above half-yearly financial statements for the six months ended 31 July 2008 do not constitute statutory financial statements within the meaning of Section 240 of the Companies Act 1985 and have not been delivered to the Registrar of Companies. The figures for the year ended 31 January 2008 have been extracted from the audited financial statements for that year, which have been delivered to the Registrar of Companies; the independent auditors' report on those financial statements under Section 235 of the Companies Act 1985 was unqualified. The half-yearly financial statements have been prepared on the basis of the accounting policies set out in the annual financial statements for the year ended 31 January 2008.

The directors confirm that to the best of their knowledge the half-yearly financial statements have been prepared in accordance with the Statement "Half-yearly financial reports" issued by the UK Accounting Standards Board and the half-yearly financial report includes a fair review of the information required by (a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year, and (b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period, and any changes in the related party transactions described in the last annual report that could do so.

The calculation of the revenue and capital return per share is based on the return on ordinary activities after tax for the period and on 54,434,646 (2007 48,020,971) ordinary shares, being the weighted average number of shares in issue during the period.

The proposed interim dividend of 2.0p per share for the year ending 31 January 2009 will be paid on 5 December 2008 to shareholders on the register at the close of business on 7 November 2008.

A copy of the half-yearly financial report for the six months ended 31July 2008 is expected to be posted to shareholders on 3 October 2008 and will be available to the public at the registered office of the company at Northumberland House, Princess Square, Newcastle upon Tyne NE1 8ER and on the NVM Private Equity Limited website, www.nvm.co.uk.

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